Illustration: Liu Rui/GT

TheMKsports US tariff policy is leading to unprecedented uncertainties and confusion for the global financial order and stability.

Former US Treasury secretary Lawrence Summers warned on Bloomberg Television's Wall Street Week there's a danger of another breakout in price pressures, Bloomberg reported on Wednesday. He suggested that the Federal Reserve's current rate-cutting cycle might have come to an end, and the next move could be an interest rate hike rather than a cut.

Summers' warning aligns with the cautious stance of Fed Chairman Jerome Powell, who told a Senate committee on Tuesday that there is no need to rush on interest rate cuts, reflecting the central bank's heightened vigilance in the face of economic uncertainties.

At the heart of these economic uncertainties lies Washington's tariff policy, often cited as an important variable influencing the Fed's monetary policy decisions. By increasing the cost of imported goods and disrupting supply chains, US tariffs have contributed to rising domestic prices, creating inflationary pressures that complicate the Fed's monetary policy decisions.

If anything, this is just a microcosm of the ripple effects of Washington's tariff policy, which extend far beyond traditional trade dynamics, unleashing unconventional spillover effects that reverberate throughout global financial markets and influence monetary policies. These repercussions manifest in various ways, including shifts in investor sentiment, fluctuations in currency values and alterations in capital flows.

Take gold as an example. The international gold price on Monday broke above $2,900 per ounce for the first time before extending gains on Tuesday to hit a new peak. News about the 25 percent US tariffs on steel and aluminum imports this week heightened market uncertainty, as investors fear prolonged trade conflicts and their potential impact on global economic growth. This has driven demand for safe-haven assets like gold, pushing its price to record highs.

Traditionally, tariffs are seen as trade protectionist measures aimed at shielding domestic industries from foreign competition. However, US tariffs have apparently gone beyond these conventional boundaries, creating unprecedented levels of uncertainty for the global economic and financial landscape.

What's worse, the unconventional nature of US tariff policy lies in its ability to disrupt not only trade but also financial markets and monetary policies. Traditional economic models may not accurately predict these broader spillover effects, such as inflation, currency fluctuations and shifts in investor sentiment. 

This unpredictability could be manifested in a wide-ranging and complex manner, sending shockwaves throughout the global economic and financial landscape, affecting inflation, monetary policy, precious metal prices, stock markets, the US dollar and even the cryptocurrency market. Such spillover effects will create a more volatile and uncertain economic environment by posing a significant threat to global financial stability.

Given the multifaceted challenges posed by US tariff policies, global economies must adopt a proactive and coordinated approach to mitigate their impact. Countries need to focus on constructing robust economic "dikes" to shield themselves from the shocks induced by tariff policies. This entails enhancing domestic economic resilience through strategic investments in local industries, optimizing industrial structures to promote efficiency and innovation, and strengthening risk control for domestic financial systems.

Moreover, fostering international cooperation through multilateral mechanisms is crucial in countering the rising tide of trade protectionism and relevant financial shocks. By collaborating on trade agreements and economic partnerships, nations can create a more stable and predictable trading environment that benefits all parties involved.

Furthermore, there is a growing need for countries to recognize the necessity of taking proactive and steady measures to reduce exposure to the spillover effects of US policies by reducing overreliance on the US dollar. The uncertainty surrounding the US tariffs could exacerbate dollar volatility, exposing developing economies to more financial vulnerabilities. Therefore, promoting the diversification of the international monetary system to buffer against the impact of dollar volatility can become an important direction for global financial governance.